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In this finance learning lab lesson, we're going to be explaining commonly asked questions about pro forma, financials. We're going to take a look through six. Very commonly asked questions, ranging from you'll what are pro forma financials? When are they useful? Are there different variations of them and how does this relate to GAAP (Generally accepted accounting principles)? And some of the other words and terminology that I'm hearing anything interesting happening in the past or any laws that I need to know if I'm involved in Pro formas. And finally, if I've decided I want to actually create my own pro forma. How do I even get started?
The first question you need to ask if you're wondering know what is a pro forma financial statement is to figure out what does pro forma mean and the term pro forma actually comes from a Latin word and it means as a matter of form, it's the style or the way that we're putting together these different projections. Means we also need to understand what our financial statements pro forma financial statements. We know that pro forma is referring to the form so we're kind of saying their projections. They're going to fall into the form of financial statements. Let's think what are the three key financial statements income statement, balance sheet and cash flow? So when it comes down to it, a pro forma financial statement is nothing more than your projection, meaning your guess your estimate, what you Believe will happen in the future, on your company's income statement, your balance sheet and your cash flow just to do a quick recap. Your income statement is going to capture the revenue and expenses of your business. Meaning what? What you're selling to your customers and what it costs you to sell your balance sheet is going to be covering what your company owns, what it owes to people and what your shareholders own and have invested in the company. And finally, your cash flow is really going to be telling you all of the different financing investing and operating activities that you're involved in.
So pro formas are not going to be capturing information on the past or historic information. They're not going to be capturing your actual records of what happened for that reason. They don't tend to be used very often for compliance or any tax reasons because they're not telling you what actually happened. Your pro forma projections, are telling you your plans, what you see into the future. When do they become helpful? Well, actually in pretty much any scenario where you're trying to plan your business, you're in particular, if you're in a growth environment because if you're in a growth environment, you're likely to be needing to do things with your company different than you've done in the past.
It is also often very wise to also have multiple versions of your pro formas that maybe serve different purposes. You may want to create a pro forma financial projection that captures a little bit more on the conservative side and if this happens, and if that happens will we be able to keep the lights on in our company and you may also want to have a scenario that's a little bit more aggressive and if these good things happen and and we hate our different targets you know what might that actually mean for a company's Financial so that we can plan accordingly. There's no one single version of your pro forma financials though. It is common to have a agreed-upon base, so that people are kind of working towards the same target, but you can get a lot of insights by running pro forma financials across a range of different assumptions because it just sets you up that much.

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